The Treasury Market Doesn't Like This Tax Cut Idea One Little Bit

It may surprise some of you to know that here in America, we are in a new stage of democracy. In this new stage, how individuals behave at the polls is not relevant when it comes to governing the country. What matters is how people buy and sell assets, and how asset prices reflect the public's ire or pleasure with the way Congress and the Executive Branch are running the country. In that sense, we are not directly a democracy per se, but rather, a financial instrument-intermediated democracy. We are, to give it an official-sounding acronym, an FIID.

Now, in a FIID, such as ours, it doesn't matter what individual voters say they want (individuals are, after all, prone to hyperbole and whining), or how individuals express their political desires through the polls (whether actual voting polls, or merely public opinion polls). Nor does it matter what economists might warn (economists are prone to doom, gloom, error and disagreement amongst themselves). It does not matter what a politician reasonably feels would be in the long-term, medium term or indeed, short-term best interests of the country. After all, who is to say what "best interests" means or whether one policy or another is in the country's "best interests"? Who, that is, but the capital markets - which in an FIID act as "The Voter". Substantial scholarly research proves that the capital markets are highly efficient when it comes to digesting information and predicting future outcomes. You can bet that what The Voter says is likelier than not to be correct, which is why it actually makes sense for politicians to ignore economists, their constituents, and their own common sense and simply do what The Voter tells them to do.

Accordingly, if Congress does something and The Voter registers displeasure (for instance, by sending bond yields soaring), you can assume Congress has acted foolishly and, in fact, Congress should quickly reverse itself (as we saw during the TARP debacle of 2008). If The Voter registers pleasure, or perhaps, only a muted reaction to whatever Congress has done (or failed to do), then Congress has actually gotten it right and all the politicians can pat themselves on the back and take credit for causing the Dow Jones to run up higher (which we saw Senator Kerry do just this past weekend when he pointed out that since the Dow Jones is up 60%, it follows that Obama must be doing a great job).

Now that we have established that America is an FIID, it's clear why we must now turn to The Voter and see what The Voter has to say about the new tax cut proposal. Well, Treasury yields seem to have exploded around 10% higher in the past few days, while stocks have sort of tread water. This is how The Voter expresses displeasure with higher deficits. The Voter is, in the loudest terms possible, giving two big thumbs down to Congress and our President. Thus far, nobody on Capital Hill is paying much attention to The Voter, but not to worry. As we have seen now in multiple examples around the globe, from Ireland to Greece to the EU at large, The Voter doesn't quit that easily.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.